Power Talks – What can you expect from the fiscal space in 2018?

Budget 2018 is due to be presented in around 13 weeks. The process of preparing the budget formally began today with the publication of Summer Economic Statement 2017 by the Department of Finance. This publication will form part of the negotiations on Budget 2018 that will take place between relevant stakeholders prior to its delivery in October. It basically provides an analysis of where the economy is today and where it is likely to go; the state of the public finances and their likely evolution over the coming years; the priorities of Government in relation to taxation and public expenditure; and most importantly from a budgetary perspective, the so-called fiscal space that will be available to the Minister for Finance going forward.

The fiscal space is basically the amount of money available to government to give away in tax cuts and expenditure increases, once all prior commitments and EU fiscal parameters are taken account of. It is envisaged that the structural budget will be in balance in 2018 and on this basis, the Department estimates that the available fiscal space in 2018 will be €1.2 billion. When account is taken of the carryover revenue and expenditure effects of measures introduced in Budget 2017, there will be €500 million available for new discretionary measures in Budget 2018.

Of this, €300 million will be available for new expenditure increases and just €200 million for tax reduction measures. Perhaps changes will be made to the composition of taxes in October’s budget, along the lines of reducing taxes that have a distortionary impact on economic activity and increasing taxes that are not deemed to have a distortionary impact on growth, but the overall benefit to the hard-pressed taxpayer will be pretty minimal. It doesn’t appear at this stage as if those people who get up early in the morning will be much better off following the budget. To put it in context, a lifting of the threshold at which one ends up paying the marginal rate of tax by €1,000 to €34,800 would cost around €178 million.

Total gross voted expenditure is set to grow by €2 billion or 3.4% in 2018. There is a welcome aspiration to increase capital spending quite significantly over the coming years, so projects such as the Limerick to Cork motorway and the Metro North will likely get the green light. Significant resources will also be directed at housing. We will get more detail on capital expenditure plans over the coming months and this has to be welcomed.

From 2019 onwards a rainy-day fund will be set up, which will see €500 million per year transferred from the Exchequer. There is a commitment to continue to reduce the debt to GDP ratio to 60%, and thereafter to 55%. However, the 45% target set by Michael Noonan has been pushed out until major capital projects have been completed. This is sensible and pragmatic.

The economic backdrop to Budget 2018 and beyond is quite constructive. Real gross domestic product (GDP) is forecast to grow:

by 4.3% this year;

by 3.7% in 2018;

by 3.1% in 2019;

by 2.7% in 2020

and by 2.5% in 2021.

Forecasting growth this far out is necessary, but is basically a total waste of time and events can happen that will blow the most scientific forecasts out of the water. However, based on what we know at the moment, the short and medium-term future for the Irish economy looks reasonably positive.

The unemployment rate is projected to decline to 5.5% in 2019 and to bottom out at that level. It stood at 6.3% in June 2017. Total employment in the economy is forecast to grow to 2.3 million by 2021.

If these forecasts were to materialise, it would represent a positive operating environment for business in general, but the burdened personal sector will only see its situation improve gradually. Dealing with the personal sector will remain challenging, but at least it is getting gradually better.

The real problem of course is that however one looks at it, the fiscal resources are very limited and serious choices will have to be made. It will prove impossible to please all of the people and in fact it will prove very difficult to please very many at all. Last year’s budget adopted a very scatter gun approach to fiscal policy with a significant amount of money thrown at a lot of different areas through taxation and expenditure measures. The net result is that considerable resources were expended, but they were spread very thinly and nobody was significantly better off at the end of the day.

With the limited fiscal space available, perhaps it would be wiser just to focus all available resources at a very limited number of areas and make a real and meaningful impact, but that is not how politics works!

Jim Power,
Chief Economist,
Friends First

The views and opinions expressed in this article are those of the author.